Ghost Global is a weekly segment brought to you by the Ghost Grads on a rotational basis. This week, Karel Zowitsky updates us on earnings from giants like PepsiCo, Delta, Morgan Stanley and more.
PepsiCo’s woes in Europe
PepsiCo has achieved revenue growth in each operating region except for Europe, which fell 5% for the six months to June 11th, 2022 to $4.8 billion. Over the same period, net revenue for the group grew 7% to $36.4 billion.
PepsiCo has been impacted by the conflict in Ukraine, which has impacted manufacturing and business activities in the region. This year, the company has recognized $1.6 billion in impairments as a result of the conflict.
If we split out the once-off gain associated with the sale of the Tropicana, Naked and other juice brands to PAI Partners in the first quarter for $3.5 billion, then year-to-date operating profit is just over $4 billion vs. $5.2 billion in the comparable period. Adding back the impairment gives us $5.6 billion vs. $5.2 billion, which tells a more accurate story of underlying profitability that is under the control of the management team.
Sadly, shareholders are also exposed to things beyond anyone’s control. For now at least, Europe is causing headaches for PepsiCo.
How high can Delta fly?
With restrictions easing across the world, people are taking to the skies once more. Domestic passenger revenue was 3% higher compared to the June 2019 quarter and international passenger revenue has seen an 81% recovery compared to the June 2019 quarter.
There is still room for improvement, specifically in the Pacific, with Australia and South Korea reopening and restrictions in Japan easing.
It is worth noting that Delta still has a long recovery ahead. Operating income is down 29% and net income is down 40% compared to the second quarter in 2019. This is due to a combination of factors, not least of all the average fuel price per gallon increasing from $2.08 USD to $3.74 – an increase of 79.8%!
This puts a lot of pressure on management to run at full capacity to avoid operating losses. This must be balanced against the need to keep the rights to fly certain routes. This is a tough balancing act between operational efficiency in the short-term and growth and longevity in the long-term.
Investment banking revenues take a dive
Banking has hit a slump. Morgan Stanley delivered decent results when viewed in isolation. On a comparable basis though, revenue went backwards across the board. Net income is down 11% from Q2’21 and investment banking revenues took the hardest knock, down 55%.
When corporate transactions dry up, so too do the advisory fees related to these deals. On the plus side, market volatility helped drive increases in equity and debt revenues on the trading desks, though not enough to offset the advisory fee issues.
Wealth management revenue also fell, which is to be expected when markets are down.
Ericsson is connected to the future
Ericsson provides 5G mobile infrastructure in North America and Europe. Revenue in the latest quarter was up 5% year-on-year and a gross margin of 42.1% was achieved, slightly down from 43.4% in Q2’21 due to the impact of component and logistics costs. Operating profit margin went the right way though, up from 10.6% to 11.7%.
There’s a change in reporting segments coming in the next quarter, with Digital Services and Managed Services being merged into a single segment called Cloud Software and Services. This is a response to customer demand for cloud technologies.
Blackrock revenues and margins drop
Asset management firms are exposed to the broader fortunes of the markets. Considering this has been a terrible first half of the year for practically all asset classes, Blackrock’s 6% drop in revenue in the latest quarter doesn’t seem too bad. Operating margins deteriorated, as one would expect when revenues decrease. Margin fell from 40.1% to 36.9%.
The company is executing extensive share buybacks, taking advantage of market conditions to mop up its own shares at a lower price. This has a positive long-term impact on earnings per share, as there are simply fewer shares in issue. The share price is down 34% this year.
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